Seeking Alpha: Strong Operations In Mexico Buying Time For BBVA In Spain

Diversification has paid off for BBVA (BBVA). While Spain's economy continues to struggle, operations in Mexico, the U.S., and South American countries like Chile, Peru, and Colombia have continued to generate much-needed profits from their capital base. Although there may be too much optimism about a pronounced near-term turnaround in Spain, BBVA is nevertheless positioned to benefit from consolidation, better consumer conditions, and long-term credit repair.

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Strong Operations In Mexico Buying Time For BBVA In Spain

Investopedia: HSBC Faces A Longer Road Back To Normal

With operations in 87 countries and every major region of the world, HSBC (NYSE:HBC) basically is world banking, or at the very least has a much wider view than almost any of its competitors. To that end, investors should take some encouragement from what looks like better operating conditions around the globe. That said, investors should not ignore HSBC's lower forward ROE guidance - a strong hint that the banking industry of tomorrow will not resemble the intra-bubble levels of profitability any time soon. (For background reading, see Analyzing A Bank's Financial Statements.)

An OK End to the Year 

For the full year of 2010, HSBC reported that revenue increased just over 3% to $68.2 billion, missing the consensus estimate by about $1 billion. Net interest income fell a bit more than 3%, largely due to lower rates. The company's overall net interest margin fell as well. The biggest delta on the revenue lines, though, was in trading results: HSBC booked about 25% less revenue here than in the year-ago period and that meant $2.6 billion less in operating revenue.

Unfortunately, the company did not exactly make up for it as it went along. Compensation and administrative expenses both grew at rates that outstripped revenue growth and the company saw its efficiency ratio move to an uninspiring 55.2% - well above its 50% target level. (For related reading, see Measuring Company Efficiency.)

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The Curious Case Of Brazil And Turkey

I do not spend all that much time talking about economics, monetary policy, and the like, but I am making an exception to talk about an interesting “compare and contrast” situation in the emerging markets. Specifically, I find it very interesting to see the unusual monetary policy being pursued by Turkey vis a vis other large emerging economies like Brazil.

High Growth, Lower Rates

Turkey is currently enjoying some of the best growth in Europe, coming in at about 8% for 2010. In most cases, that sort of growth would have policymakers nervous about inflation and looking to hike rates to cool things off. After all, that's what's going on in countries like Poland, Hungary, China, and Brazil right now.

Turkey is handling things quite a bit differently though, and lowering rates. Last week, Turkey's central bank cut rates by 25bp (to 6.25%) after cutting them 50bp back in December. At the same time, the country is raising banks' reserve requirements.

The idea here, then, is to deter yield-shoppers and limit the inflow of speculative/investment capital. Unfortunately, world markets do not usually react well to the unorthodox or the unexpected, and Turkey's actions are both – Turkey's central bank has been pretty cagey and this last rate move took the market by surprise. Moreover, a lot of economists and commentators believe that Turkey will botch this delicate balancing act and that the tougher reserve requirements won't offset the stimulation of lower rates and that this will this ramp up credit growth and stoke inflation.

What might be helping embolden Turkey's officials is the fact that inflation is very low by Turkish standards – about 6.4% in December. On the flip side, the ballooning current account deficit is a real concern, standing as it does at over 7.5% for the last period I could find data. Given that higher rates do not always produce their desired consequences, it is a credible (if very unorthodox) approach for Turkey to try.

That said, this unorthodox policy is certainly not helping Turkey's financial sector and major banks like Garanti (Nasdaq: TKGBY), Akbank (Nasdaq: AKBTY), and Yapi. All of those stocks have taken a smacking lately, as has the stock of Turkcell (NYSE: TKC). If Turkey's central bank is ultimately proven right, this could be a great buying opportunity in one of my favorite markets. If this “low rate in the face of high growth” policy backfires, though, it could take years to sort out the damage.

Brazil Going The Conventional Route

While Turkey is trying something new, Brazil is sticking to the old pattern. Brazil recently bumped its interest rate up 50bp to 11.25%, due in no small part to concerns about inflation. While Turkey has had bouts of high inflation before, it doesn't have the same history of some truly rampant hyper-inflation periods like Brazil does. Consequently, it is hard for me to imagine Brazil's central bank ever being cavalier about the risks of inflation. Unlike Turkey, Brazil also has much less to worry about in terms of its current account balance and the impact of capital inflows.

Not surprisingly, though, this round of tightening hasn't been great news for Brazilian bank stocks like Itau (Nasdaq: ITAU) or Banco Bradesco (NYSE: BBD). On the other hand, it has made virtually no difference for major exporters like Embraer (NYSE: ERJ) and Vale (Nasdaq: VALE). And then you have the broader market ETFs like the iShares Brazil Index (NYSE: EWZ) and Market Vectors Brazil Small-Cap ETF (NYSE: BRF) – with a mix of exporters and more domestically-oriented stocks, these have traded lower, but not to the same extent as the financials.

It will be interesting to see how these two countries' policies play out. Clearly there are very different circumstances for each economy – Brazil is highly leveraged to China's development and appetite for raw materials, while Turkey is keenly exposed to Europe's health and demand for lower-cost manufactured imports. Nevertheless, Brazil runs the risk of choking off growth at time when it really needs to be using the windfall of commodity exports to develop a more balanced and sustainable economy. On the other hand, Turkey is not endangering its growth, but may well be risking its future stability.

The Bottom Line

I do not want to sound too cavalier about things, but on some level I dismiss monetary movements as “rates go up, rates go down … and the markets march on”. It's not wise to ignore a country's economic conditions or present fiscal/monetary policies, but you also cannot lose the forest for the trees. Should investors buy Brazilian financial stocks in the face of higher rates or Turkey financials in the face of market disapproval and uncertainty? Maybe not. By the same token, long-term value investors know that stocks often turn before the news changes and these stocks will probably stabilize and start rebounding ahead of any official “all clear” in interest rates.

More to the point, Turkey and Brazil are two places I really want to be for the long haul.

So, how cute should an investor be? After all, banks like Itau, Garanti, and Yapi are now trading at pretty attractive valuations. Sure, there is the risk that the stocks could go down another 10-20% with investor worries about monetary policies. But tell me when, exactly, there isn't *some* risk that could push down the price of an emerging market stock by a similar amount.

All things considered, I'd probably rather own exporters, but that's not always so easily done. The most liquid stocks (and those most likely to trade as ADRs) are usually domestic-focused companies like banks, utilities, and telecoms. It's a little easier with Brazil, with stocks like Embraer, Brazil Foods (Nasdaq: BRFS), and Vale, but there are fewer options with Turkey beyond ETFs, index funds, mutual funds, and a few stocks like Anadolu Efes.

The bottom line, then, is that I'd be looking to start buying. Maybe world markets are at a near-term top and maybe we're all due for a pullback. That's just part of the risk of investing. Given the turbulence and concerns over monetary policy, though, I'd probably take a multi-stage approach – looking to buy maybe one-third of my position in the next few weeks, another third a few weeks later, and the final third in a few months.

What should investors buy? I would take a very serious look at the three banks – Akbank, Garanti, and Yapi (the first two are reasonably liquid ADRs). I would also dig deeper and look into names like Anadolu, Tofas, Koc Holdings and so on. In fact, I hope to be back in a week or so with some additional Turkish names, hopefully with available ADRs. For Brazil, I'm talking my book, but I'd seriously consider Brazil Foods, as well perhaps as Cosan (NYSE: CZZ), Vale, Itau, Petrobras (NYSE: PBR), and Hypermarcas.

Disclosure: I own shares of Turkcell and Brazil Foods

Want A Strong Bank? Think ICICI

After spending a lot of 2009 and 2010 rebounding from freak-out lows, American banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) are choking and sputtering. Not only are investors wrapped up in the negative headlines about potentially huge mortgage documentation risks, but loan growth is stagnant and the U.S. is still over-banked.

On the flip-side, the picture for banks outside of the U.S. and Western Europe is quite a bit brighter. In India, strong credit growth and surprisingly strong credit quality is providing a healthy environment, and ICICI Bank (NYSE:IBN) is making hay while the sun shines.

The Quarter That Was
ICICI reported earnings for its fiscal second quarter that handily surpassed the analysts' targets. Bottom-line earnings rose 19% in the quarter, fueled by 8% growth in net interest income and a 40% drop in provisions. Growth was helped by margin expansion of 10 basis points, loan growth of 2%, and deposit growth of 13%, while a significant rise in expenses (10%) was a dampener. (For more, see The Bottom Line On Margins.)

Credit quality is getting better. As the 40% reduction in provisions might suggest, ICICI is feeling good about its balance sheet. Impaired loans were a bit more than 8% at the end of the quarter, continuing a multi-quarter sequential strength of improvement. As a percentage of loans, non-performing loans were 1.4% in the quarter on a net basis.

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